HONG KONG - The scene is Rick's Cafe, in war-time Casablanca. The town's head
of police, Captain Renault, has ordered the joint closed.
Rick: "How can you close me up? On what grounds?"
Captain Renault: "I'm shocked, shocked to find that gambling is going on in
here!"

Hong Kong appeal court judge Justice Anthony Rogers may be less a man of the
world than Casablanca's fictional police chief. Yet his reaction last week to
"outrageous" terms offered to shareholders by Richard Li Tzar-kai's Hong
Kong-listed PCCW was no less amusing, given the Asian city's recent public

displays of corporate contempt for minority shareholders.

Justice Rogers was commenting during the latest culmination of attempts by Li
to privatize PCCW, Hong Kong's biggest fixed-line telephone operator, in which
he had bought a controlling stake in 2000. The company also runs mobile phone
and Internet operations.

Li had secured the go-ahead for his privatization scheme on February 4 this
year, when 1,404 shareholders voted for the scheme and 859 voted against, for a
majority margin of 545 votes on a headcount basis.

This met the requirements of local rules under which a privatization scheme
must secure the support of 75% of independent shareholders by share value but
also the approval of 50% of the shareholders physically present at the relevant
shareholders' meeting - a criteria dubbed the "headcount rule". The rationale
behind this is to ensure the interests of minority shareholders are looked
after.

Hong Kong's securities market regulator, the Securities and Futures Commission
(SFC), then alleged that up to 726 of the votes in favor of the deal might have
been the result of "share splitting", or the practice of dividing shares to
boost the headcount in support of such a proposals.

A high court ruling on the issue, on April 6, cleared the takeover - because
splitting blocks of shares is not illegal in Hong Kong. At the heart of that
case, the SFC alleged that the regional director of Fortis Insurance Co (Asia),
Lam Hau-wah, on January 5 bought 500,000 PCCW shares to hand out as bonuses to
Fortis agents and others. Of the recipients, 494, who were newly registered
shareholders, voted in favor of the buyout offer.

The SFC brought to light messages and phone calls between Lam and Francis Yuen
Tin-fan, the deputy chairman of Singapore-listed Pacific Century Regional
Developments (PCRD), which is Li's Singapore-listed flagship and one of the two
controlling shareholders of PCCW. The other is mainland-based China Netcom
(which the government in Beijing last year instructed should be taken over by
China Unicom as part of a shake-up of the Chinese telecommunications sector).

The SFC appealed against the high court ruling, although it was in accord with
the fact that share-splitting was not actually against Hong Kong stock-exchange
rules. It asked the appeal court to exercise its "discretion" and issue a
ruling on whether the practice was "fair and just".

Justice Rogers, one of the three appeal court judges, clearly thought it was
not. He described as "outrageous" the scheme by Li and partner China Netcom to
acquire for HK$15.9 billion (US$2.1 billion) the 52.4% of PCCW that they do not
own, then have PCCW pay a $18.78 billion special dividend to Li and China
Netcom.

The $4.50 per share offer price, Rodgers said, was too low. Li is seeking the
buyback after seeing the share value collapse from $131.75 in 2000. The stock
was trading at $2.51 before he made his offer last October.

The appeal court will release later the full reasoning behind its judgment to
halt Li's privatization plan.

Justice Rogers told the court "there’s just an amazing series of coincidences
in this case", after hearing the evidence of the link between PCRD deputy
chairman Yuen and Lam.

The ruling followed a number of other high-profile snubs to Hong Kong's
investors and the apparent impotence or unwillingness on the part of the city's
exchange regulators to act.

An estimated 48,000 people in Hong Kong saw their savings disappear last year
after they had placed HK$20 billion into bond-like products linked to or issued
by Lehman Brothers. After the collapse of the US-based bank last September, the
investors claimed the products were mis-sold as low-risk.

Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong this month
admitted in a Legislative Council public hearing on the "minibond" saga that
minibonds were complicated and the name misled people into thinking that the
products were bonds.

Responding to charges that HKMA's benchmark was too lenient when eight
mortgage-linked products could be rated as low-risk and medium-risk, Yam said
that the SFC had failed to require lenders to re-evaluate risks entailed in
their products once the market changed.

A lawsuit on behalf of SAR minibond buyers has been filed in New York against
units of HSBC, Lehman and the Bank of New York Mellon for alleged failure to
protect investors.

Earlier this month, it was revealed that CNOOC, the Hong Kong-listed unit of
China’s biggest offshore oil producer, China National Offshore Oil Corp, had
for years falsely stated the earnings of its senior executives. This was
purportedly to give the impression to Western investors when CNOOC dual-listed
in Hong Kong and New York eight years ago that the company had adopted some
international procedures such as management incentive schemes to bring it in
line with its global counterparts.

CNOOC's annual report for 2008 showed that chairman Fu Chengyu earned 12.047
million yuan (US$1.77 million) last year, almost as much as the total amount
paid to the board of rival oil company Sinopec.

A China National Offshore Oil Corp spokesman said on April 13 that the
incentive scheme for the CNOOC's senior management was only a show. The stated
remuneration bore little relation to the executives' actual take-home pay,
which is determined by the State-owned Assets Supervision and Administration
Commission of the State Council, based on individual merit.

So far, the SFC appears to have taken no action against CNOOC.
Fu himself admitted on April 19 on the sidelines of the Boao Forum for Asia
annual conference in China's Hainan province that the company's official pay is
designed to convince investors that management has generous Western-style
incentive schemes to ensure they are well motivated.

In a slightly less bizarre case, though involving a vastly larger amount of
money, police this month raided the offices of Citic Pacific, the Hong Kong arm
of a Chinese government investment company, which had earlier admitted large
losses on foreign exchange contracts. Founding chairman Larry Yung Chi-kin and
managing director Henry Fan Hung-ling quit after the raids, and directors were
asked to assist investigations into allegations of false statements and
conspiracy to defraud.

The SFC started investigating Citic Pacific last October after it reported
losses of $14.63 billion related to a number of forex contracts.

The company is accused of being aware as early as September 7 last year of the
degree of exposure it faced arising from the contracts, yet it released a
circular on September 16 indicating that there was no adverse information that
it should declare to the market. It was not until six weeks later that the
scale of possible losses was made public, sending its share price tumbling.

Legislator Chim Pui-chung, who represents the financial services sector in the
city's Legislative Council, said the recent corporate scandals showed the
existing regulatory system no longer worked well.

"The city has not had a clear regulatory system, which has led to a lack of
supervision over listed companies and even the whole financial industry, which
has damaged Hong Kong's image as an international financial market." It is
confusing that the SFC acts as a market overseer while Hong Kong Exchanges and
Clearing serves as front-line regulator, he said.

"It is a defective system allowing the authorities to shirk responsibility.
There should be an overhaul of financial market regulation in the city," he
said.

Corporate governance activist David Webb, the first to alert the SFC to the
Fortis share-splitting for the PCCW vote, welcomed the appeal court ruling in
the case as "a good day for corporate governance in Hong Kong". But his hope
for more like it might be a while in become reality.

Secretary for Financial Services and the Treasury Chan Ka-keung said the
government will consult with the market and study rules of other jurisdictions
before deciding whether the city's Companies Ordinance needs to be revised.

The part of the law containing the "headcount rule" in the PCCW case also
affects negotiations between a company's creditors, so the administration will
need to study the situation thoroughly before making any changes, Chan said
after the court ruling.

SFC chief executive Martin Wheatley vowed to probe other alleged malpractices
in a bid to protect small shareholders. "The investigation of any alleged
market misconduct in the deal will continue to ensure the interests of minority
investors are protected," Wheatley said.

How that may be done may become more difficult, given that the global financial
turmoil has cast doubts on many regulatory changes over the past decade or so.

Democratic Party legislator Kam Nai-wai called for expanded powers for a
centralized market watchdog to replace the fragmented regulatory bodies formed
by the SFC and the Hong Kong Monetary Authority and the Hong Kong stock
exchange.

"We should set up a powerful single regulator like Britain's Financial Services
Authority [FSA] to oversee all banks, brokers, fund managers and listing
affairs," he said.

British Prime Minister Gordon Brown, now facing the threat of obliteration of
his party at the next general election, established the FSA when he was
chancellor of the exchequer, or finance minister. He, and the country's voters,
are now paying heavily for the failure of the FSA to forecast and forestall the
collapse of mortgage lender Northern Rock in 2007 and the subsequent financial
crisis. Other role models might be preferable for Hong Kong.